The eagerly awaited IR35 off-payroll draft legislation was published by the UK Government in mid-July, extending the public sector IR35 changes to large and medium-sized businesses in the private sector.
Despite speculation, the draft legislation unfortunately keeps the government on course for implementation on April 6 2020.
Those following the changes will be aware the legislation intends to remove the perceived tax advantages received by those operating via a personal service company (PSC).
What you need to know
Expected to be introduced in this Autumn’s Finance Bill, the draft legislation is broadly in line with the public sector rules but there are changes. Firstly, small companies and small groups of companies will not be required to operate these rules if they are the end-client of the PSC’s services. The same tests will apply for Limited Liability Partnerships. For other unincorporated entities, the Companies Act’s turnover test will apply.
Secondly, it introduces a status determination statement (SDS) which end-clients must provide directly to the worker and any third party with whom they contract. The SDS will be passed down the labour supply chain to the fee-payer.
The SDS has to include not only the client’s “deemed” employment status, but also the rationale behind it.
There is also an explicit requirement for clients to take “reasonable care” in undertaking status assessments but, unhelpfully, there is no definition of reasonable care.
Failure to take reasonable care, or failing to provide an SDS, will result in clients being deemed the fee-payer where they are not already, so they will be responsible for PAYE/NIC withholding, and any liabilities.
There are mixed views around the value of the SDS and whether they are just another administrative burden, or if the issuing of the SDS will mean more transparency and help reduce the risk of incorrect or blanket determinations. Only time will tell.
Thirdly, the draft legislation states that the end-client is best placed to resolve status disagreements in real time.
On receipt of the SDS, the worker or fee-payer may make “representation” to the end-client if they disagree. The end-client must respond within 45 days, informing the worker or the fee-payer of the outcome of its considerations. If they conclude that the original determination was correct, they must provide their rationale. If the original determination is considered to be incorrect, the end-client must issue a new SDS to worker and fee-payer.
HMRC acknowledges this will create additional work but that will be no comfort to the contractor as there is little bite within the legislation to suggest that an engager will overturn their original decision.
Finally the draft legislation and the government’s response to the off-payroll working policy paper and consultation confirms that the controversial transfer of liability provisions will form part of the new rules.
Though this legislation has not yet been published, it is expected to allow HMRC to transfer liabilities to an agency at the top of the labour supply chain, or to the end-client where there is non-compliance further down the supply chain and HMRC cannot collect amounts due from the offending party.
HMRC has stated that the transfer of liability provisions will only be applied in specific circumstances, for example, where tax avoidance is involved, rather than where there is a genuine business failure.
We will not know exactly how these provisions will work in practice and how businesses can protect themselves from any transfer of liability until HMRC guidance is issued and the PAYE regulations are updated. What is clear is there will be a requirement for end-clients, agencies and intermediaries to have additional contractual protection in contracts.
With only seven months to go before the legislation comes into play, businesses must take steps now to ensure compliance ahead of the legislation going live.
Charlotte Edwards, global employment taxes senior manager and head of IR35 at Anderson Anderson & Brown